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U.S. consumer borrowing up $10.4B in July

WASHINGTON (AP) -- Americans cut back on using their credit cards in July for the second straight month, while taking on more debt to buy cars and attend school. The decline in credit card use suggests consumers remain cautious, a trend that could hold back economic growth.

Consumers increased their borrowing $10.4 billion in July from June to a record high of $2.85 trillion, the Federal Reserve said Monday. That followed a gain of $11.9 billion in June.

A category that includes auto loans and student loans increased $12.3 billion in July to a record $2 trillion. But a measure consumers' credit card debt fell $1.8 billion to roughly $850 billion. That followed an even larger $3.7 billion decline in the credit card category in June.

July's pattern of consumers' borrowing habits illustrated trends that have surfaced in the post-recession economy: Americans are using credit for their most urgent needs, while forgoing debt for discretionary purchases.

The auto and student loan category is up 8.1 percent from a year ago and has risen in every month but one since May 2010. But credit card debt has barely changed in the past year and is nearly 17 percent below its peak hit in July 2008 -- seven months after the Great Recession began.

Slow but steady job growth and small wage gains have made many Americans more reluctant to charge goods and services to their plastic. That could hold back consumer spending, which accounts for 70 percent of economic activity. Americans may also be hesitant to take on more high-interest debt because of higher Social Security taxes.

At the same time, the weak economy is sending more people back to school. The Federal Reserve's consumer credit report does not separate student loans and auto loans. But the Federal Reserve Bank of New York quarterly report on consumer credit shows student loan debt has been the biggest driver of borrowing since the Great Recession officially ended in June 2009.

Economists are hoping that as the impact of those higher taxes fades, consumer spending will strengthen in the second half of this year. That forecast is also counting on steady job growth to bolster income growth and support higher spending.

But there are forces still working to dampen growth, including thousands of federal furloughs which depressed income growth in July. And job growth has been weaker than first thought.

The government reported that employers added 169,000 jobs in August but 74,000 fewer jobs in June and July than previously reported.

The unemployment rate dropped to 7.3 percent, but lowest in nearly five years. But the rate fell because more Americans stopped looking for work and were no longer counted as unemployed.

The overall economy grew at an annual rate of 2.5 percent in the April-June quarter. But recent data has economists predicting that growth may be slowing in the July-September quarter to an annual rate of 2 percent.

The Fed's borrowing report tracks credit card debt, auto loans and student loans but not mortgages, home equity loans or other loans secured by real estate.